Better Incentive Policy

Today, cities across the United States use incentives to drive job creation, capital investment in buildings and infrastructure, and neighborhood revitalization. For many jurisdictions, incentives represent substantial public expenditures, whether these occur in the form of direct loans and grants, foregone tax revenue, or pledges of local government credit. In 2012, the New York Times found that the total value of annual state and local incentives granted exceed $80 billion.[1] The ongoing courtship of Amazon by cities vying to host the company’s second headquarters – with economic incentives cited by Amazon as a key criterion – has again brought such incentives to the forefront of national policy conversations. Given the scale of the investments involved, local policymakers and members of the public are increasingly concerned with ensuring that incentives deliver progress against core economic development objectives and generate the greatest public benefit for the least cost.

Aligning Incentives to Advance Public Policy Objectives

In most cases, cities’ incentives toolkits are legacy policies that were developed within a different market and policy context, with programs oftentimes rooted in underlying state statutory frameworks. For this reason, the toolkits that exist today may be more reflective of past environments instead of present conditions. In cases where cities have begun to see the fruits of successful efforts to attract investment in their downtowns and core adjacent neighborhoods, many are re-evaluating the need for subsidy in new development projects in strong submarkets. As cities look toward promoting greater inclusivity, local administrations are also looking to how their incentive programs can best support equitable investment across a wider range of neighborhoods.

Cities must periodically reassess their toolkits to ensure that the structure and deployment of their incentives advance policy objectives and address current-day market challenges. In assessing their incentive toolkits, city leaders must ask themselves a fundamental question:

How effective are our incentive policies in advancing progress against the critical economic and community development challenges we confront as cities today?

Agreeing on economic and community development policy goals is an important starting point. In some cases, doing so requires cities to find ways to reconcile potentially conflicting goals. For example, cities may need to consider how best to balance a desire for the greatest aggregate job growth with an interest in supporting quality jobs that offer living wages and viable career ladders.

Answering this question also requires accurate measurement of the costs and benefits of incentive deals, including the opportunity cost of foregone tax revenue and an understanding of the public benefits delivered. In many cases, this requires careful efforts to collect and verify data on incentivized projects, a clear methodology to measure program outcomes, and a willingness to revisit approaches to project evaluation metrics and tracking processes.

Finally, a constant concern in managing incentive programs is ascertaining that the level of incentive provided is commensurate with the need – “but for” the provision of the incentive, a given project would not have happened. Asymmetrical information issues can frustrate public sector efforts to ensure the efficiency of their programs, as businesses and developers seeking incentives have better knowledge of their capital and operating costs and the corresponding need for public subsidy to fill any financial gaps. In some cases, cities will rigorously “gap test” projects to assess the level of subsidy required. In other cases, economic development departments can periodically evaluate the relative need for incentive support citywide, studying different types of development projects within a range of submarket conditions. Cities can then vary the level of subsidy to better reflect market realities and encourage delivery of public policy objectives. In some cases, cities have leveraged this knowledge to directly address matters of equity; one example is a “recapture” of excess tax increment for incentive deals within strong submarkets, to be reallocated for investment in historically underserved neighborhoods.

Innovative Approaches in Cincinnati, Columbus, and New Orleans

With assistance from HR&A, the cities of Cincinnati and Columbus, Ohio, and New Orleans, Louisiana, have all undertaken strategic reviews of their incentives programs within the past two years.

Cincinnati sought to assess the relative effectiveness of its incentive programs in achieving its economic development goals, as well as identify how to adapt its incentive regime moving forward, given the city’s growing momentum as a place to live and work. HR&A helped Cincinnati develop a strategic framework defining when and how to deploy specific incentive programs, including creating a standardized set of metrics, based on historical data, to enable deal comparison within and across programs. We also helped create a single database for all incentive programs, building on the data we compiled for our study, as well as user-friendly tools and reports for project evaluation and performance tracking, streamlining project review by staff and City Council and more clearly communicating the public benefits of projects.

Columbus sought to understand the need for incentives to catalyze development in different submarkets, as well as the overall competitiveness of its commercial incentives. HR&A helped the City identify opportunities to re-calibrate its current incentives in different market contexts to maximize public benefit. We recommended recapturing a portion of the value offered by incentives in more prosperous submarkets to support investment in distressed areas, strategically leveraging funds and targeting them where they are most needed. In addition, we reviewed the City’s portfolio of commercial incentives, and identified opportunities to use incentives to support the creation of higher-wage jobs and drive place-based investment.

For New Orleans, HR&A is currently leading a comprehensive assessment of the City’s incentive portfolio to enhance its alignment with broader economic and community development policy goals. HR&A conducted a deep dive assessment of four priority incentive programs to identify their relative efficiency in achieving desired outcomes for different types of projects. We are providing the City with a strategic framework for deploying its incentive toolkit, consisting of initiatives to streamline oversight of incentive programs, create program-specific mandates that help to maximize delivery of public goods such as affordable housing and workforce development, and expand program access and deepen incentives for underserved communities.

If you’re interested in how HR&A can help your city maximize the value produced by your incentive policies, please contact Partner Cary Hirschstein.